Bitcoin’s plunge to around $75,500 briefly pushed the price just below Strategy’s ( MSTR ) average buy price of around $76,037 per share. coin.
That may sound alarming at first glance, and technically puts Michael Saylor’s company underwater on its bitcoin holdings, but it doesn’t fundamentally change the company’s financial position.
There is no balance sheet stress and no forced sale risk. What it does is slow down its future bitcoin purchase.
The strategy currently holds 712,647 bitcoin – all of it is unencumbered, meaning none of the holdings are pledged as collateral, so there is no risk of a forced sale just because the price falls below the purchase cost.
Some may question what happens to the $8.2 billion convertible debt when the bitcoin price falls below the threshold.
The debt load may sound massive, but it also offers plenty of flexibility.
Strategy can extend maturities (roll over its debt), convert debt into equity when they mature. Note that the first sale date of convertible notes is not until the third quarter of 2027.
There are also other ways of dealing with the obligations. For example, other bitcoin tax companies, like Strive (ASST), have recently used tools like perpetual preferred stock to retire its convertible debt. Strategy has similar options if needed.
Where the pressure shows is in fundraising.
Historically, Strategy has mostly financed its bitcoin purchases by selling new shares through at-the-market (ATM) offerings. What this means is that a company that wants to raise capital by issuing shares instructs brokers to sell them at the current market price instead of selling a large portion of new shares at a discount. What this does is that shares are sold to the open market, minimizing the impact on the market price.
But that strategy only works well when the stock trades at a premium to its net asset value (mNAV), a metric that compares a company’s market capitalization to the real-time market value of its bitcoin holdings. Last Friday, when bitcoin was around $90,000 to $89,000, the multiple was around 1.15x for the strategy, indicating a premium to its bitcoin holdings. But with bitcoin falling from around $85,000 to the mid-$70,000s this weekend, that premium has now fallen to a discount or below 1, making new stock increases less attractive.
So trading below cost basis is not a crisis.
It simply slows Strategy’s ability to grow its bitcoin stack without diluting shareholders. For context, back in 2022, when MSTR’s stock was trading below bitcoin holdings for most of the year, the company only added about 10,000 bitcoin.
The company isn’t likely to go under on this, but shares could potentially react negatively if the bitcoin price holds at these levels or falls further when markets open on Monday.
Read more: The strategy’s increased dollar buffer covers more than 2 years of dividend obligations
Disclaimer: The analyst who wrote this article holds shares of Strategy (MSTR).
